Cryptocurrency “liquidity crisis” spreads to Silvergate Bank

After much speculation, finally, the USD transaction processor for many major crypto companies in the US, Silvergate Bank, also showed signs of difficulty.

The crypto “liquidity crisis” spreads to Silvergate Bank. Photo: Bloomberg

In the last 24 hours, the hotly discussed keyword in the crypto market must have been Silvergate BankSilvergate Bank. Accordingly, Silvergate Bank’s delay in filing a report with the SEC, only to be announced by many major crypto companies to cut ties, is causing the market to fear that this will be the latest name to collapse because of the liquidity crisis. accounts following the FTX event – ​​Genesis bankruptcy, leading to direct legal consequences.

Who is Silvergate Bank?

Silvergate is a US-based bank that is well known in the crypto world for providing banking solutions to crypto companies through the SEN network.

The reason for Silvergate’s popularity is that it is a licensed bank and insured by the Federal Deposit Insurance Corporation (FDIC), giving depositors extra protection in the event of bankruptcy.

Crypto partners that used to be part of Silvergate’s SEN network

At one time Silvergate was a banking partner of most crypto exchanges operating in the United States, but as of early 2023, the bank’s website only had the logos of 5 crypto companies including Coinbase, Kraken, Bitstamp and two stablecoin issuers, Circle (USDC) and Paxos (BUSD, USDP).

Since the collapse of the FTX exchange in November 2022, Silvergate is rumored to be in trouble when in its Q4/2022 report, the bank admitted a net loss of $1 billion, customers withdrew up to $8 billion and then to cut staff by 40%. Silvergate’s SI stock price then crashed by 50% in 24 hours because of the negative news.

Silvergate Bank was later investigated by US authorities to clarify its relationship with the FTX exchange.

Silvergate is late to report to the SEC

As a public company listed on a U.S. stock exchange, Silvergate Bank is obligated to file periodic business reports with the U.S. Securities and Exchange Commission (SEC).

However, on March 1, Silvergate Bank filed an application with the SEC saying it could not file financial statements for the whole of 2022 because it “may not have enough assets” and is “reassessing its business”.

Silvergate said that “additional losses may be required to be recorded in relation to non-stock portfolio investments”, so more time is needed to analyze and update the books because of recent events. .

As a result, the bank admitted that it could not meet the deadline for filing its business report with the SEC on March 16.

Silvergate’s SI share price fell another 48% on March 1 because of the unexpected statements from the bank.

Crypto companies simultaneously cut ties with Silvergate

By the evening of March 2, concerned about the situation of their banking partners, a series of their large crypto companies that also have relationships with Silvergate announced that they would stop doing business with them.

Starting with the largest cryptocurrency exchange in the US, Coinbase. The platform announced that “because of the latest news”, the exchange has decided to stop accepting USD deposits and withdrawals to accounts at Silvergate. As an alternative, the exchange will find other partners that can process USD transactions and commit not to let any users be affected.

Coinbase asserts that the exchange “has minimal exposure to Silvergate.”

Next, Circle, Paxos, Gemini and Galaxy Digital simultaneously clarified their relationship with Silvergate and all said they would find ways to reduce their exposure to banks, as well as stop depositing and withdrawing transactions with Silvergate accounts.

Meanwhile, Bitcoin investment company MicroStrategy announced that it is borrowing $ 200 million from Silvergate, but it will not be due until the first quarter of 2025 and will not be affected even if the bank goes bankrupt. MicroStrategy also has no other custodial relationship with Silvergate.

Silvergate’s SI share price in the trading session on March 2 (US time) continued to “evaporate” another 57% of its value, falling to the lowest level in history. Compared to the price of more than 52 USD at the time before the FTX crisis, SI stock has now divided 10 times to 5.7 USD.

Silvergate’s SI stock price movement, TradingView screenshot on the morning of 3/3/2023

US tightens crypto banking operations after FTX case

After the collapse of FTX, the US government issued a warning to banks about cooperating with companies operating in the field of cryptocurrency. Specifically, the three main US banking regulators including the Federal Reserve (Fed), the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) have issued a warning. The joint notice reminds banks of their “safe and sound” obligations, and outlines the risks that regulators see in the cryptocurrency sector.

Accordingly, some of the risks that officials have identified include:

  • Fraud and fraud;
  • Legal uncertainties surrounding liens;
  • Misleading claims and advertisements by crypto companies;
  • The sensitive, contagious nature of the cryptocurrency industry.

While the statement notes that banks are not prohibited from doing business with licensed crypto companies, the three regulators are now concerned about banks holding large amounts of illegal cryptocurrencies. permits and the problem of excessive leverage on this high-volatility asset class.

Next, the world’s largest cryptocurrency exchange, Binance, admitted to having lost its banking partner in the US and was forced to stop supporting USD deposit and withdrawal transactions for users since mid-February. The new USD transaction processing banking partner has not been announced yet.

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